True or False?
True or False: The LCG team only invests in profitable companies, while the SCG team is willing to consider unprofitable companies.
False. The SCG team will only invest in cash flow positive companies.
What is the range of holdings we are willing to hold in US SCG?
A range of 25-45 names.
Why has it seemed like the portfolio was in a state of constant turnover in 2023?
The team was responding to heightened market volatility, adding to and trimming positions over longer periods of time. This was most evident through use of extended quiet periods where at times it appeared as if 2/3 of the portfolio was in quiet period.
It feels like there has been a lot of personnel change lately. Why?
How many unprofitable companies have made their way into our SCG portfolios at initiation?
5 total, out of 82 companies we've invested in total.
Simply put, what is the intent of the Flywheel?
The flywheel is how the SCG team assesses quality. While it's comprised of 5 elements, it can be thought of in three buckets:
- Quality business
- Quality management team
- Quality of opportunity set (for reinvestment)
True or False: The # of unprofitable companies in Polen SCG portfolios is greater now than it was when Tucker was on the portfolio.
False. In mid/late 2021, there was an uptick in unprofitable companies as a function of the environment.
What is the average # of holdings we've owned in US SCG since inception?
28
Did turnover indeed rise in 2023? Is our team doing more trading than we have in the past?
While turnover was slightly above average in the fourth quarter at ~40%, it was ended 2023 in the mid 30's%, generally in-line with the US SCG strategy's historical average.
Who are the 3 longest tenured members of the Small Company Team?
Rayna, who has been a named PM on US SCG since 2017.
Whitney & Shane, who have been with the team since 2019.
Has there been a regime change in terms of our current PM team putting more (or fewer) unprofitable companies into the portfolio?
Yes! 80% of the unprofitable companies that have ever initiated in a Polen SCG portfolio occurred in 2H 2021, while Tucker Walsh was lead PM.
Going forward, Rayna & Whitney demand that a company demonstrate profitability before entering our portfolios.
Compared to the broader indices, what sources of funding should we expect Polen SCG companies to draw on to fund growth?
Self-funding! This ensures we are underwriting healthy companies, who maintain financial flexibility in good times and bad.
This also insulates quality companies from the impacts of higher rates, which sets them up to diverge from competing businesses that are forced to divert FCF to debt payment.
True or False: 50% of companies in the Russell 2000 Growth index are unprofitable.
Very true! To say nothing of the other 50%, which features many highly levered and cyclical companies. SCG is truly in rarified air!
How many holdings do we own in US SCG now?
35
What was the peak time period for turnover in the SCG portfolio, and what levels did we hit?
COVID pandemic timeframe, peaked north of 50% mid-way through 2020.
This coincided with the prior PM team's stewardship of the strategy, and before Tucker left the firm.
Why did Troy Renauld depart the team?
He had an opportunity to join a small private partnership, started by a friend of his.
Troy and his friend had worked together as adjunct professors at Boston College and are partnering on a new venture called "Worldly Partners Management."
Troy did not have US coverage at his time of departure.
What is the reason that historically, unprofitable companies were allowed into the portfolio?
In the 2H 2021 market environment, 4 companies with strong unit economics, and a path to profitability within 1 year, entered the portfolio.
It would be fair to say that the strong bull market at that time played a factor in supporting the decision to allocate to non-profitable companies.
Again, this occurred under Tucker Walsh's tenure as Lead PM.
In what ways are LCG & SCG universes different with respect to Cash Flow?
86% of R1000G has positive FCF.
50% of R2000G has positive FCF.
Many small cap growth businesses are earlier in their life cycles with one (maybe two) lines of business, leading to lower/lack of profitability as compared to large caps which are scaled and often optimized for profitability.
Polen US SCG has outperformed in 4 out of 7 of the quarters, since strategy inception, where the index has had negative returns.
FALSE
Polen US SCG has outperformed in 5 of these 7 quarters! The only 2 quarters in which we experienced negative Excess Returns were Q1 and Q2 of 2022.
Both quarters largely attributed to Rising Rates / Inflation, in other words - macro repricing, not re-underwriting quality of the businesses in our portfolios.
What is the lowest # of holdings we've ever owned in US SCG?
25
What commitments have our SCG PM's given Distribution as it relates to Quiet Periods in 2024?
Recognizing that telling our stock stories is a key differentiator for Polen's brand, and with support from our compliance team, PM's will put tighter date range bands around securities.
The use of Quiet Periods only when there is a higher level of conviction that trading may occur in the near-term, should free us up to tell our company stories more freely.
Why did Rob Forker leave the team in 2023?
Resource optimization + Investing in team culture.
1) Many team resources had previously been invested in studying lower conviction, time intensive, and distant companies in Asia. The team was finding that the level of research was disproportionate to its broader opportunity set, with relatively few names making it into the portfolio.
2) Performance in strategies like International Small Company Growth were underwhelming. Disproportionate and costly investment in that franchise carries risk to team morale and cohesion in its mission.
How many names in US SCG are unprofitable today?
1 (Warby Parker). We tolerate this due to discretionary growth investments they are making.
In what ways are LCG & SCG universes different with respect to longevity as a public company?
Median LCG companies have been public for 22 years.
Median SCG companies have been public for 9 years (with a long list of companies under that number).
This structural difference requires an adaption of the 5 guardrails, which evolves into the "Flywheel" concept.
True or False: Small Growth Portfolios need to have the same level of concentration as Large Growth portfolios in order to achieve similar Active Share.
False. Small cap indices don't suffer from the same extreme concentration issues as large cap indices, meaning high active share can be achieved even at higher name counts. The median manager has 80 holdings and often >90% active share.
How many managers in the eVestment US Small Cap Growth universe have fewer than 35 holdings?
6.
This compares to 60 managers with less than 35 holdings in LCG.
How has our PM Team's outlook evolved with respect to concentration targets for the portfolio?
Allowing slightly less concentration (up to 35 names, rather than 30) can allow for more balance across the safety-growth spectrum without sacrificing on active share. Even at 35 holdings, we'd remain among the most concentrated managers in the SCG segment and we are able to deliver a smoother return profile.
Is Polen's team turnover "normal" for our industry?
Very normal! In fact, 28 managers in the SCG segment experienced a PM transition between late 2021 -> late 2023.
What expectations can you hold our team to regarding cash flow health on new positions for our SCG portfolios?
We intend to only invest in cash flow positive businesses.
What is the key risk to applying a rigid "5 Guardrails" approach to the SCG universe when doing an initial screen?
The risk around being too restrictive on the front end, means potentially missing the next great compounder that goes from small, to mid, to large.
Think: Amazon, Salesforce, Netflix.